Free Promissory Note Template — Personal & Business Loans

A promissory note is the cornerstone of any loan arrangement. Whether you're lending money to a family member, documenting a business loan, or creating a payment obligation for goods and services, a properly drafted promissory note creates a legally enforceable debt instrument that protects the lender.

What Is a Promissory Note?

A promissory note is a written promise by one party (the "maker" or "borrower") to pay a specified sum of money to another party (the "payee" or "lender") on demand or at a specified future date. It is a negotiable instrument under Article 3 of the Uniform Commercial Code (UCC) — meaning it can be transferred to a third party. A promissory note specifies: the principal loan amount, interest rate (if any), repayment schedule (lump sum, installments, or on demand), due date, late payment penalties, whether collateral secures the loan, and remedies upon default (acceleration, collection costs, attorney's fees).

When Do You Need a Promissory Note?

• When lending money to a family member or friend and wanting a legal record of the debt
• For a personal or business loan between individuals or entities
• When providing seller financing for a business or real estate transaction
• When documenting a deferred payment for goods or services delivered
• When converting an informal loan to a formal debt obligation

Legal Considerations

• Most states have usury laws capping maximum interest rates — check your state's legal rate before setting the interest rate
• A promissory note secured by real property must typically be recorded with the county recorder to protect the lender's priority interest
• Without a provision allowing acceleration of the full balance upon default, the lender can only sue for missed payments one at a time
• IRS regulations require minimum interest rates for family loans above $10,000 to avoid gift tax implications — the Applicable Federal Rate (AFR) applies
• The statute of limitations on written contracts (typically 4–6 years) governs how long the lender has to sue on a defaulted note

State-Specific Requirements

Most states follow the UCC for negotiable instruments. Interest rate limits under state usury laws vary: California limits consumer loans under $2,500 to 30% APR; business loans are less restricted. Texas has no usury limit for commercial loans. New York's criminal usury rate for business loans is 25%. Always check state usury limits before setting interest rates.

How to Complete This Document — Step by Step

1. Identify Borrower and Lender
   Full legal names and addresses for both the maker (borrower) and payee (lender). For entities, include the business name and state of formation.
2. State the Principal Amount
   The exact dollar amount being loaned or owed. Write it out in words and numbers.
3. Set the Interest Rate
   Define the annual interest rate (APR). If the loan is interest-free, state that explicitly. Check your state's usury limits.
4. Define the Repayment Terms
   Choose: demand note (payable when demanded), lump sum on a specific date, or installment payments (monthly, quarterly, etc.) with specific due dates and amounts.
5. Include Default and Acceleration
   Define what constitutes a default (missed payment, bankruptcy, etc.) and include an acceleration clause making the entire remaining balance due immediately upon default.
6. Address Security/Collateral
   If the loan is secured by collateral (vehicle, equipment, real estate), reference the security agreement and describe the collateral.
7. Sign Before a Notary
   While not legally required for a promissory note to be enforceable in most states, notarization significantly strengthens enforceability and prevents the maker from later denying they signed it.

Common Mistakes to Avoid

• Setting an interest rate above the state usury limit — makes the entire note unenforceable in some states
• No acceleration clause — forces the lender to sue for each missed payment separately rather than the entire balance
• Not specifying whether the loan is secured or unsecured — secured notes have much stronger collection rights
• Family loans over $10,000 with 0% interest — IRS may treat the imputed interest as a taxable gift